Southern Cable Group Bhd (Official website Nov 2024)
Hong Leong Investment Bank Bhd (HLIB Research) has raised its target price for Southern Cable Group Bhd (SCGBHD) to RM1.45 from RM1.15, citing strong earnings growth and a robust outlook. This marks a 16.9% capital upside from the current price of RM1.24, with an expected total return of 16.9%.
The research house raised its earnings forecasts for the financial year 2024 (FY24), FY25, and FY26 by 13%, 20%, and 19% respectively, reflecting robust sales growth and an expanding capacity. SCGBHD's 9M24 earnings were reported at RM47 million, a 176% year-on-year (YoY) increase, surpassing expectations and making up 82% of HLIB's full-year forecast.
SCGBHD's stellar performance was mainly driven by strong demand from utility companies and the accelerated commissioning of its Lot 38 facility. Sales to utility companies increased by 70% quarter-on-quarter and 82.8% YoY, fuelled by pent-up demand in the power infrastructure market. The company's ongoing expansion and capacity utilisation are expected to sustain growth, especially as Tenaga Nasional's long-term distribution contract, expected within the next two months, should provide a further boost.
The company has benefited from the booming demand for power cables, especially from direct current and combined cycle power plants . Sales of medium voltage (MV) and high voltage cables have grown from 30% to 45% of total orders, reflecting a shift towards higher-margin products. The expansion of SCGBHD's production capacity, particularly with its planned addition of 5,000km at its existing plant by mid-2025, is aimed at meeting rising local and international demand. The new capacity will focus on manufacturing low voltage (LV) and MV cables, which are expected to be in high demand from both Tenaga and US customers.
The US market has been a particularly strong performer for SCGBHD, with sales increasing due to heightened demand and the company's expanded capacity. SCGBHD currently delivers 45-50 containers of XHHW-2 cables per month to a major US customer, up from 40 containers in the first half of 2024. The group also expects to further enhance its presence in the US market with the commercialisation of a new USE-2/RHW-2 LV cable by the second quarter of 2025. HLIB expects US sales to continue growing, supported by these new product offerings and the expansion of production capabilities.
Additionally, SCGBHD is poised to benefit from its new plastic compound plant, which will improve its margins by ensuring better cost control and a consistent supply of plastic compound—essential components for power cables. The integration of this upstream segment is expected to enhance the group's overall cost structure and profitability.
HLIB's positive outlook on SCGBHD is underpinned by the group's leading position in Malaysia's power cable business and the favourable market dynamics, including the expected growth in power demand and the exit of a major competitor. The group is well-positioned to capture a larger market share, particularly with the upcoming Tenaga distribution contract and expanding capacity. HLIB's revised target price of RM1.45 reflects these optimistic prospects, placing SCGBHD in a strong position for future growth.
